Fortune Brands Innovations Inc

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Introduction

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is a supplement to the accompanying consolidated financial statements and provides additional information on our business, recent developments, financial condition, liquidity and capital resources, cash flows and results of operations. MD&A is organized as follows:

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Recent Developments: This section provides a summary of noteworthy recent developments in the most recently completed fiscal year in the operation of the business, including acquisition activity.

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Overview: This section provides a general description of our business and a discussion of management’s general outlook regarding market demand, our competitive position and product innovation, as well as additional recent developments we believe are important to understanding our results of operations and financial condition or in understanding anticipated future trends.

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Basis of Presentation: This section provides a discussion of the basis on which our consolidated financial statements were prepared.

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Results of Operations: This section provides an analysis of our results of operations for the fiscal years ended December 28, 2024, December 30, 2023 and December 31, 2022.

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Liquidity and Capital Resources: This section provides a discussion of our financial condition as of December 28, 2024 and an analysis of our cash flows for each of the three years ended December 28, 2024, December 30, 2023 and December 31, 2022. This section also provides a discussion of our contractual obligations, other purchase commitments and customer credit risk that existed at December 28, 2024, as well as a discussion of our ability to fund our future commitments and ongoing operating activities through internal and external sources of capital.

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Critical Accounting Estimates: This section identifies and summarizes those accounting policies that significantly impact our reported results of operations and financial condition and require significant judgment or estimates on the part of management in their application.

Recent Developments

On February 29, 2024, we acquired 100% of the outstanding equity of Wise Water Solutions LLC., doing business as SpringWell Water Filtration Systems ("SpringWell"), for a purchase price of $105.6 million, subject to post-closing adjustments, net of cash acquired of $1.4 million. We financed the transaction using cash on hand and borrowings under our existing credit arrangements. The results of SpringWell are reported as part of the Water segment. We have not included pro forma financial information as the transaction is immaterial to our condensed consolidated statements of comprehensive income. The fair value allocated to assets acquired and liabilities assumed as of February 29, 2024, was $105.6 million, which includes $85.2 million of goodwill. Goodwill includes expected sales and cost synergies and is expected to be deductible for income tax purposes.

Overview

The Company is a leading innovation company focused on creating smarter, safer and more beautiful homes and lives that is focused on the design, manufacture and sale of market-leading branded products in the following categories: plumbing and accessories, including digital water products, entry door and storm door systems, security and safety products, and outdoor performance materials used in decking and railing products.

For the year ended December 28, 2024, net sales based on country of destination were:

We believe that the Company has certain competitive advantages including market-leading brands, a diversified mix of channels, lean and flexible supply chains and a strong capital structure, as well as a tradition of strong innovation and customer service. We are focused on outperforming our markets in growth, profitability and returns in order to drive increased stockholder value. We believe the Company’s track record reflects the long-term attractiveness and potential of the categories we serve and our leading brands. We believe the long-term outlook for our products remains favorable, and we have a number of strategic advantages, including the set of capabilities we refer to as the Fortune Brands Advantage, that has helped us to continue to achieve profitable organic growth over time.

We continue to believe our most attractive opportunities are to invest in profitable organic growth initiatives, pursue accretive strategic acquisitions, non-controlling equity investments, and joint ventures, and return cash to stockholders through a combination of dividends and repurchases of shares of our common stock under our share repurchase program as explained in further detail under “Liquidity and Capital Resources” below.

The U.S. market for our products primarily consists of spending on both new home construction and repair and remodel activities within existing homes, with a substantial majority of the markets we serve consisting of repair and remodel spending. Growth in the U.S. market for our home products will largely depend on consumer confidence, employment, wage growth, home prices, equity levels and rates of extraction, stable mortgage rates and credit availability. Increases in inflation and mortgage rates during the preceding years have slowed the pace of single-family and existing home sales activity and new home construction and repair and remodel activities. However, we believe we are well positioned to manage the continued slow-down in the housing market as we believe the fundamental drivers of the housing market remain intact.

We have been and may continue to be impacted by near-term supply, labor and freight constraints, a volatile geopolitical environment, as well as sustained elevated rates of inflation, fluctuating interest rates, unfavorable fluctuations in foreign exchange rates and the ongoing and potentially worsening costs of tariffs (including recent U.S. tariffs imposed or threatened to be imposed on China, Canada and Mexico and other countries and any retaliatory actions taken by such countries). We continue to manage these challenges and are diligently working to offset potential unfavorable impacts of these items through continuous productivity improvement initiatives and price increases.

During the three fiscal years ended December 28, 2024, our net sales declined at a compounded annual rate of 1.4% reflecting the contraction of the U.S. home products market and a decline in demand in our international markets, partially offset by an increase in sales resulting from acquisitions. Operating income grew at a compounded annual rate of 9.1% with consolidated operating margins ranging between 16% and 17% from 2022 to 2024. Growth in operating income over this period was primarily due to changes to our portfolio of businesses, control over our operating expenses and the benefits of manufacturing productivity programs.

During 2024, the U.S. home products market was relatively flat overall as an increase in new home construction activity was mostly offset by a decrease in repair and remodel activity. We believe new housing construction activity increased approximately 7% and spending for home repair and remodeling decreased approximately 3% in 2024 compared to 2023. In 2024, the Company's net sales declined 0.4% due to lower sales in our international markets ($136.7 million), higher customer sales incentives and unfavorable foreign exchange ($6.9 million), partially offset by the benefit from the acquisitions of Springwell and the Emtek and Schaub premium and luxury door and cabinet hardware business (the "Emtek and Schaub Business") and the U.S. and Canadian Yale and August residential smart locks business (the "Yale and August Business", and, collectively with the Emtek and Schaub Business, the "Acquired Businesses") from ASSA ABLOY, Inc. and its affiliates ("ASSA") ($175.5 million). In 2024, operating income increased 20.0% over 2023 primarily due to the impacts of the acquisitions of SpringWell and the Acquired Businesses, raw material cost deflation, lower transportation costs, lower restructuring charges and productivity improvements in all of our segments as a result of strategic sourcing initiatives and manufacturing efficiencies as well as the absence of the 2023 asset impairment charge ($33.5 million). These factors were partially offset by increased intangible amortization expense as a result of the acquisitions of SpringWell and the Acquired Businesses ($11.4 million), higher customer sales incentives, higher advertising and marketing costs, higher headcount related costs and higher distribution expenses.

Basis of Presentation

The consolidated financial statements in this Annual Report on Form 10-K have been derived from the accounts of the Company and its wholly-owned subsidiaries. Effective January 1, 2023, the Company changed its fiscal year end from December 31 to a 52- or 53-week fiscal year closing on the Saturday closest but not subsequent to December 31 of each year. The following discussion contains references to years 2024, 2023 and 2022, which represent fiscal years ended December 28, 2024, December 30, 2023 and December 31, 2022.